The future of legal services pricing

Transcription

1 1 The future of legal services pricing 28 February 2012

2 Contents 2 1. The market context 2. Alternative billing arrangements 3. International trends 4. Where to from here?

3 1. The market context 3

4 The market context 4 Over the past few decades the demand for legal services within organisations increased dramatically due to legislative changes and compliance issues At the same time the cost of legal services increased significantly faster than CPI While pressure to reduce legal expenditure already existed, the GFC intensified the need for organisations to cut costs Many organisations are seeking alternatives to hourly rates

5 Biggest challenges for 2012? 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% t

6 Law firms are too profitable 6 70% 60% 50% 40% 30% 20% 10% 0% Corporate counsel Private practice attourneys Source: LexisNexis, 2009

7 The ascendancy of General Counsel 7 In your opinion, which role is perceived to carry greater influence in a business environment? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Partner of large law firm General Counsel Source: Deloitte, 2010

8 Change in buyer behaviour 8 You don t hear much these days about getting good results. That portion of the dialogue seems to have disappeared. When I started practice we use to get work the old fashion way we got results. Larry Byrne - Linklaters Some firms focus on substance, others focus on process. We want both. Craig Glidden Lyondell Basell

9 How do you know if the price is right? 9 What are the characteristics of the right price?

10 What do we mean by pricing? 10 Pricing is the process of determining what a firm will receive in exchange for its services Key inputs Objectives Costs Competitors Client value Process elements Who - Roles What - Strategies How - Tools Monitor, control and feedback Components Fee level Fee structure Communication of fee and value

11 Market positioning 11 Price Premium Midmarket Economy Benefits

12 2. Alternative billing arrangements 12

13 Pricing structures 13 Hourly rates Discounted hourly rates Blended hourly rates Volume discounts Capped fees Percentage of project Fixed fees Monthly retainer Unit fees Event fees Performance-based billing Contingency fees Value billing Hybrid structures

14 Billable Hour Under Attack 14 Wall Street Journal, 24 August 2009 In recession companies push law firms for flat-fee contracts With the recession crimping legal budgets, some big companies are fighting back against law firms longstanding practice of billing them by the hour. The companies are ditching the hourly structure which critics complain offers law firms an incentive to rack up bigger bills in favor of flat-fee contracts. One survey found an increase of more than 50% this year in corporate spending on alternatives to the traditional hourly-fee model. The shift could further squeeze earnings at top law firms. The past 18 months have been brutal for some big law firms as work that hinges on vibrant credit markets, such as deal making, has flat-lined.

15 Time to kill hourly billing 15 Australian Financial Review, 30 July 2010 Billing by the hour often fails to align a lawyer s interests with a client s. Since there is clearly a demand for an alternative to the billable hour, you would expect someone to supply it. And indeed, this is starting to happen. 44 per cent of members (of the ACC) asked their lawyers for alternative billing to cut costs in 2009, more than any other cost-reducing measure. Clients are not merely trying to screw down fees but rather are aiming for predictability and fairer, not just lower, bills. This means lawyers must sit down with clients at the start and discuss what exactly they want to achieve, and how much success might be worth to them. Different needs call for different billing structures. Repeatable documents are one thing; complex litigation is another. That still leaves many hours being billed the old-fashioned way.

16 The future of hourly billing 16 The billable hour has become an encumbrance on professionalism, placing a premium on inefficiency. Chief Justice Robert French, Oct 2010 In markets where sophisticated clients operate, the choice of the client is often hourly billing NSW Law Society President, Stuart Westgarth, Feb 2011 There are advantages to briefing out to external providers who are not using the billable hour President of ACLA, Suzanne Hillier, Jan 2012

17 Your opinion of the hourly rate t

18 Pricing structures 18 Hourly rates (e.g. $650 hour) Variants include: Discounted hourly rates Blended hourly rates Volume discounts Fixed fees (e.g. $50,000 for a defined matter) Event fees (e.g. $8,000 per tenant for shopping centre lease documents) Monthly retainer (e.g. $15,000 a month for corporate records) Value billing (e.g. a $300,000 fee if a PPP consortium wins the bid) Variants include: Success fees Contingency fees Performance-based billing Percentage of project Hybrid structures (e.g. capped fee)

19 Price structures 19 Value Success fee Structure aligned to Fixed fee Retainer Event fee Cost Hourly rates Firm Risk associated with uncertainty lies with Client

20 Use of alternative billing methods 20 Fixed fees (other than annual) Contingency fees Discounted hourly rates Blended hourly rates Retainer arrangements Hybrid fees Capped fees Task-based fees Capped hourly rates Annual fixed fee Volume discounts Contingent structures Success fees Early payment discount Premium billing Rate cap Performance-based billing Retrospective fee based on value Equity in lieu of fee 0% 10% 20% 30% 40% 50% 60% 70% Source: Incisive Legal Intelligence, 2009

21 Alternative billing arrangements 21 Cisco Morgan Lewis Tyco - Eversheds Workcover South Australia - Minter Ellison Telstra Gilbert + Tobin

22 Use of alternative billing 22 60% 50% 40% 30% 20% 10% 0% Have used or plan to use Considering Not considering Source: Hildebrandt, 2009

23 Resistance to alternative billing % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% From law firms From within company Source: Serengeti Law, 2010

24 Fee structures 24 Percentage hourly rate billing Proportion of respondents 90% or more 77% 67-89% 13% 50-66% 10% Less than 50% Zero Source: Jasper Consulting, 2010

25 Fee structures 25 The primary alternatives to hourly rates mentioned were: Contingency / success fees For major deals, particularly involving consortiums Fixed fees Particularly for volume transactions such as leasing and financing Event fees Particularly for volume transactions where the process is clearly defined Dissatisfaction regarding hourly rates is primarily driven by the perception of a lack of accountability Clients are wanting estimates and want firms to keep to these estimates Cost over-runs make me look bad The key is accountability. Be accountable or we will force you.

26 Fee structures 26 Intentions regarding hourly rates vary considerably We intend to move more work to fixed fees Moving away from hourly rates will reduce costs We re not happy with hourly rates but haven t found anything better It s not an issue. We have no desire to change.

27 Dealing with the 27 shift away from hourly rates To minimise dissatisfaction with hourly billing, firms need to behave in a more accountable manner Firms will need to develop their ability to provide accurate estimates to minimise their financial risk A c c o u n t a b i l i t y Accurate estimates Strong project management Keep clients up-to-date

28 No surprises 28 What clients want is some predictability and certainty regarding their costs. They don t like surprises ACC President Frederick Krebs

29 Fee arrangements - Hourly rates 29 When to use When the matter cannot be effectively scoped in advance Pros Low scoping cost Aligned to costs Readily available benchmarks Allows flexibility of scope and resources during a matter How to manage Set estimates for the parts possible Set milestones to review costs Regular communication to ensure no surprises Cons Can reward inefficiencies Not aligned to benefits Discourages innovation Fee not know until post-matter

30 Fee arrangements - Fixed fee 30 When to use When the matter can be scoped in advance and controlled by the firm Pros Provides certainty to both parties Enables agreement in advance Rewards efficient firms How to manage Ensure accurate, defined scope Assess costs versus similar past matters Manage variations to scope Cons May incur a high scoping / bidding cost May encourage firms to cut corners to increase profitability

31 Fee arrangements - Event fees 31 When to use When repeatable project work costs a similar amount Pros Easy to manage Low scoping cost once established Provides certainty to client and firm Encourages efficient process and innovation How to manage Clearly articulate what is included in each fee Focus on non-financial metrics Cons Most legal services are highly customised and few can be converted to event fees

32 Fee arrangements Retainer 32 When to use When budget certainty is desired When requirements are reasonably stable Pros Provides certainty to client and firm Easy to manage How to manage Clearly articulate what is excluded and how variations will be managed Focus on non-financial metrics Cons Workload, or perception of workload, may vary from month to month May create misalignment of objectives between client and firm

33 Fee arrangements Value billing 33 When to use Where the firm s contribution is key to success Where the firm can reasonably evaluate the chances of success In a relationship involving multiple transactions to even out the risk Pros Low risk for client Aligns objectives of client and firm Aligns client s costs and objectives How to manage Ensure an open and equitable relationship for long-term success Consider adopting a hybrid structure with a base component plus a success fee Cons High risk for firm Asymmetry of information between the client and the firm may make the arrangement unfair to one party

34 Fee arrangements - Hybrid structures 34 For many matters a single structure is less than optimal A combination of two or more structures may provide the optimal solution Examples include: Capped fees Hourly rates to fixed maximum Fixed plus variable

35 3. International trends 35

36 International trends 36 UK Rationalising the number of law firms used Increased use of procurement professionals Larger in-house legal teams Disaggregation of legal service provision Allocating work to Legal Process Outsourcers (LPOs) USA Rationalizing the number of law firms used Increased use of procurement professionals Larger in-house legal teams Disaggregation of legal service provision Increased focus on matter management Commoditisation (e.g. e-bay)

37 4. Where to from here? 37

38 Work with firms to reduce total cost 38 Effective pricing should be fair to the client and fair to the firm Explore with firms things that you can change to enable them to deliver their service to you at a lower cost This may involve encouraging your organisation doing more or to changing your processes for how you engage them Break down the barriers between the firm and the client to think of it as one entity

39 39 Help firms understand how you define value If the firm truly understands how you define value they are more likely to meet your needs Most lawyers do not sufficiently understand how they add value to clients and so focus solely on their legal know-how Provide firms with regular, considered feedback

40 For more information please contact Colin Jasper T: M: E: colin@jasperconsulting.com.au W: 40